Pay for performance is the only way forward

A
summer of shareholder revolt has made life distinctly uncomfortable for
so-called fat cats. Strengthened by government regulatory changes that have opened
up access to information on executive remuneration and provided new rights to
vote on reward packages, shareholders have been keen to hold company boards to
account to ensure executive pay reflects performance.  A particular source of unrest has been big payoffs to executives
departing failing companies, so much so that the DTI has launched a consultation
on whether and how corporate governance might be further strengthened to tackle
‘reward for failure’.

It
would be wrong, however, to presume shareholders are the only corporate
stakeholders expressing concern on this matter. Not only are the trade unions
up in arms – as might be expected – but so too are HR professionals. Last
year’s personnel rewards survey, published jointly by the CIPD and the Reward
Group, points to considerable discontent within HR over perceived unfairness in
the setting of executive pay. Unease stems both from the large gap in reward
between the top cadre and other ranks within organisations, and the fact
executive pay has been accelerating away from the pack. In 2002, for example,
executive pay rose three times faster than average earnings.

More
than a quarter of HR and training professionals feel their director or chief
executive is overpaid, while one in 10 reckon their employers do not care about
the fairness of pay decisions. These negative perceptions may be associated with
the findings of CIPD reward management surveys which say that communication of
reward programmes is often minimal, does not encourage transparency, and
largely excludes employee involvement in changes to the design of reward
practices. But of particular significance is the fact that a majority of HR
professionals believe that unfairness in executive pay setting has a negative
effect on recruitment (59 per cent), retention (73 per cent) and employee
commitment (78 per cent).

The
HR perspective on executive pay thus suggests that ensuring a clear link
between executive pay and performance would itself help boost performance, and
implies the need for a closer association between the way organisations
approach executive reward and reward strategy as applied to the rest of the
workforce. Even the best remuneration committees are typically fixated on the
external market – stressing the need to match executive reward packages in
comparable companies – often with little regard to reward structures inside an
organisation. Yet it is precisely this disjunction between the setting of top
pay within an organisation and that of its rank and file that underlies the
concerns about fairness and performance expressed by HR professionals. The
message from HR is therefore clear: organisations that want to avoid fat cat
controversy must consider both the ‘ins and outs’ when it comes to executive
pay.

By
John Philpott, Chief economist, Chartered Institute of Personnel and
Development

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